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Dairy Risk Management Imperative for 2021

Jim Dickrell

October 26, 2020

While milk prices appear strong for the rest of this year, the first half of 2021 looks perilous with growing milk production both here and abroad and the COVID-19 pandemic still raging.

In their monthly outlook, University of Wisconsin dairy economists Bob Cropp and Mark Stephenson are urging dairy farmers to sign-up for the 2021 Dairy Margin Coverage (DMC) program and look at other risk management tools such as Dairy Revenue Protection, futures and options. Enrollment for the 2021 DMC program ends December 11.

Milk production jumped 2.3% in September in the United States and is up 2% as well in the European Union. “That’s a lot of milk,” says Stephenson. It will take a demand surge to absorb that increase in milk output, or markets both in the United States and globally could suffer, he warns.

With COVID-19 increasing in fury in most states, a return to normal with fully open schools and businesses in the near term is highly unlikely, say the economists.

Rising feed prices will also squeeze milk/feed margins, they say. Soybean futures are now above $10.50/bu and corn is above $4/bu in some months. “Feed margins are chasing milk prices, and we could likely see some DMC payments at the $9.50 level next year,” says Stephenson. That’s especially true if Class III prices drop into the $16-$17 range.

“And I don’t think we dare count on more direct [government] payments to dairy producers next year,” he says.

Cropp says 2021 may not prove to be as volatile as the current year month-to-month. But if milk production remains strong and demand tepid, milk prices will be under pressure at least for the first half of the year. He says a rally could be possible in the third and fourth quarters, but that will largely depend on how the pandemic plays out.

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